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Chapter 20

Sunbeam

I’m a superstar in my field, much like Michael Jordan in basketball

and Bruce Springsteen in rock ‘n’ roll.

(“Chainsaw Al” Dunlap1)

Al Dunlap was certainly paid like a superstar. He came away with $100

million after 20 months of work at Scott Paper Company. Critics accused Dunlap

of enriching himself at the expense of thousands of laid-off employees. Dunlap

proudly pointed out that he had increased Scott’s shareholder value from $2.5

billion to $9 billion. “My $100 million was less than 2 percent of the wealth I

created for all Scott shareholders,” Dunlap wrote. “Did I earn that? Damn right I

did.”2

Dunlap specialized in turning around troubled companies. Before

restructuring Scott Paper, he helped turn around at least six other companies

including Sterling Pulp & Paper, American Can, Lily-Tulip, Crown-Zellerbach,

and Consolidated Press Holdings. Dunlap earned the nickname “Chainsaw Al” by

slashing costs at each of these companies. He laid off tens of thousands of

employees during his 30-year career, including 11,200 at Scott Paper alone.

Dunlap never apologized for the layoffs, claiming he worked in situations where

it was necessary to cut 35 percent of the jobs in order to save the other 65 percent.

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He blamed the layoffs on previous managers who created the problems he was

called in to fix.

Sunbeam Corporation’s board hired Dunlap in July 1996 hoping he could

revive the struggling home appliance maker. Their decision was rewarded

immediately as Sunbeam’s stock jumped from $12.50 to $18.63 on the day

Dunlap’s hiring was announced. The stock eventually reached a high of $53 in

March 1998. But three months later, in June 1998, Sunbeam’s board fired their

superstar CEO for withholding important information about the company’s

deteriorating condition. Dunlap learned firsthand what it felt like to be laid off.

Chainsaw Al

Lieutenant Albert J. Dunlap graduated from the U.S. Military Academy at

West Point in 1960. He was the first member of his family to attend college and

the first resident of Hasbrouck Heights New Jersey admitted into the prestigious

Academy. At West Point, Dunlap displayed more tenacity than brilliance. He

graduated 537th in a class of 550, but boasted of surviving a rigorous program that

four of every ten entering cadets failed to complete. Dunlap called West Point the

best business school in the world because it taught him how to lead, think, and

handle adversity.

Dunlap made a career out of doing the dirty work most CEOs dreaded.

Thirty years of closing factories and cutting payroll made him one of the most

hated business executives in the country. It was probably prudent that he lived in

a highly-secure gated community, owned a bullet-proof vest, and was

accompanied at all times by an armed body guard.

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Newspapers and business magazines regularly criticized Dunlap’s heavy-

handed management style. Government officials ranging from small-town mayors

to Labor Secretary Robert Reich complained about his layoffs. Dunlap accepted

criticism as the price of success. He wrote in his autobiography: “You’re not in

business to be liked. Neither am I. We’re here to succeed. If you want a friend, get

a dog. I’m not taking any chances; I’ve got two dogs.”3

Dunlap was devoted to his two German shepherds. When he relocated to

Philadelphia to oversee Scott Paper’s restructuring, Dunlap rented a separate suite

for the dogs at the posh Four Seasons hotel. His will designated $2 million for

their care. Although Dunlap loved dogs, he identified even more closely with

more aggressive predators. His home and office were decorated with pictures and

sculptures of lions, eagles, alligators and sharks.

“Chainsaw Al” was the most famous of Dunlap’s many nicknames. His

enemies called him “the Shredder” for the way he dismantled Scott Paper

Company. Financier Sir James Goldsmith, dubbed him “Rambo in Pinstripes.”

Dunlap embraced his various monikers. He even posed for a publicity photograph

with a black bandanna tied around his head, two ammunition bandoleers draped

across his shoulders, and an Uzzi-style machine pistol clutched in each hand.

While Dunlap’s corporate restructurings generated billions of dollars of

returns for investors, he apparently didn’t trust other CEOs to do the same for

him. Dunlap kept most of his $200 million fortune invested in U.S. Treasury

bonds, calling the stock market a “fool’s game.”4

Sunbeam

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Sunbeam was one of the most widely recognized brand names in America

during the second half of the twentieth century. Few households lacked a

Sunbeam toaster, iron or mixer. Oster Company, acquired by Sunbeam in 1960,

produced blenders, barber’s clippers and electric blankets.

Unfortunately for Sunbeam, it got caught up in the merger wave of the

early 1980s and was acquired in 1981 by conglomerate Allegheny International.

For the next seven years, Allegheny sucked nearly all the profits out of Sunbeam,

leaving little for product development or factory renovation.

Investment fund managers Michael F. Price and Michael H. Steinhardt

gained control of Sunbeam after Allegheny filed for bankruptcy protection

following the stock market collapse of October 1987. Price and Steinhardt sold 24

percent of Sunbeam’s shares through an initial public offering in 1992, keeping

the remaining shares for themselves and maintaining control over the company’s

board of directors.

Paul Kazarian was the first CEO hired by Price and Steinhardt to run

Sunbeam. Under Kazarian’s leadership, Sunbeam reported $120 million of profits

during 1992. Kazarian was fired early the next year, however, when Sunbeam’s

senior managers rebelled against his “eccentric” management style. Roger

Schipke replaced Kazarian in 1993, but couldn’t maintain the company’s forward

progress. Sunbeam’s blenders, mixers, toasters, gas grills, and outdoor furniture

all lost market share from 1993 to 1995.

Price and Steinhardt hired Al Dunlap in July 1996. Dunlap’s

compensation package—$1 million annual salary, $2.5 million of stock options,

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and $12.2 million of restricted stock—reflected both Dunlap’s reputation as a

turnaround artist and the magnitude of what he was expected to accomplish at

Sunbeam. Amazingly, Price and Steinhardt recovered their investment in a single

day. Although Chainsaw Al was feared by employees and despised by managers,

he was revered on Wall Street. The 49 percent increase in Sunbeam’s stock price

on the day Dunlap’s hiring was announced was the largest one-day increase in the

NYSE’s history.

Four months later, on November 12, Dunlap outlined to Sunbeam’s board

his plans to restructure the company. Dunlap proposed closing 18 of 26 factories

and shedding 6,000 of Sunbeam’s 12,000 employees. The downsizing, he said,

would reduce company costs by $225 million per year. At the same time, he

announced plans to double the company’s sales revenue within three years by

introducing new products and expanding exports.

Dunlap’s plan appeared to work. First- and second-quarter sales during

1997 were 13 percent above the prior year. Dunlap attributed the company’s

improved operating margins to his cost-cutting initiatives. Third quarter sales of

$289 million were 25 percent higher than 1996. Sunbeam’s stock increased

steadily as the company met or exceeded analysts’ earnings forecasts each

quarter. The share price reached $47 following the announcement of the

blockbuster third quarter.

Sunbeam’s Collapse

By late 1997, Dunlap was ready to sell Sunbeam. He had promised his

management team that Sunbeam was a 12- to 18-month project—discontinue the

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unprofitable products, close the inefficient factories, cut the unnecessary costs,

and then sell the company to somebody who would run it for the long term.

Sunbeam’s investment bankers approached numerous companies including

Gillette, Black & Decker, Rubbermaid, Maytag, and Whirlpool. If Sunbeam’s

stock price had merely risen from $12.50 into the low $30s, Dunlap probably

could have sold the company and walked away with $100 million from his stock

options. But with the stock trading near $50 per share, no other company was

interested in acquiring Sunbeam. Dunlap was stuck operating a company he had

intended only to restructure.

When Sunbeam’s investment bankers failed to find a buyer, they

suggested that Dunlap instead use his company’s inflated stock to acquire other

companies. Sunbeam announced on March 2, 1998 that it had reached agreements

to acquire three companies: Coleman Company, maker of camping and recreation

equipment; First Alert, maker of smoke alarms; and Signature Brands USA,

maker of “Mr. Coffee” brand coffee machines. The three companies’ combined

annual revenues of $1.5 billion more than doubled Sunbeam’s size. Sunbeam’s

stock reached an all-time high of $53 per share two days after the acquisitions

were announced.

Dunlap planned to issue $700 million of zero-coupon bonds to help pay

for the acquisitions. While the underwriters were performing their due diligence

work for the bond offering, they discovered that Sunbeam’s first-quarter 1998

sales were coming in significantly below forecasted amounts. The underwriters

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insisted that Sunbeam disclose its lower-than-expected sales before issuing the

bonds.

On March 19, against Dunlap’s strong objections, Sunbeam issued a press

release announcing that its first quarter sales would probably fall short of Wall

Street analysts’ projections of $285 million to $295 million. The press release

went on to say that sales were still expected to exceed 1997 sales of $253 million.

Sunbeam’s stock dropped 9 percent to $45 following the announcement.

The March 19 press release did not come close to revealing the actual

extent of Sunbeam’s problems. In fact, Sunbeam’s first-quarter sales were only

$169 million as of March 17. There was no reasonable basis for expecting that

Sunbeam’s first-quarter revenues would match those of the previous year. On

April 3, two days after its loan was funded and one day after the First Alert and

Signature Brands acquisitions were completed, Sunbeam issued a new press

release announcing that it would report a loss for the first quarter. The stock price

plummeted 24 percent to $34 following the announcement.

Sunbeam released its first-quarter financial statements on May 11. The

statements showed a net loss of $44.6 million on sales of $244 million. At a press

conference attended by stock analysts and news reporters, Dunlap tried to divert

attention from the first-quarter loss by emphasizing the “good” news that he

planned to close eight recently-acquired factories and lay off 6,400 Coleman, First

Alert and Signature Brands employees. In spite of this rather unique public

relations ploy, Sunbeam’s stock slid to $26 per share.

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The fatal blow to Dunlap’s reputation and Sunbeam’s stock price was

delivered by Barron’s magazine on June 8.5 Jonathan P. Laing’s article,

“Dangerous Games: Did ‘Chainsaw Al’ Dunlap Manufacture Sunbeam’s Earnings

Last Year?” accused Sunbeam of overstating its 1997 revenues and understating

its expenses. Sunbeam’s stock price dropped below $21 the day after the article

appeared.

Sunbeam’s board held an emergency meeting on Tuesday, June 10 to

discuss the Barron’s article. Dunlap and his two top accounting officers denied

Laing’s allegations. Phillip Harlow, the Arthur Andersen partner in charge of

Sunbeam’s audit, reiterated his belief that Sunbeam’s 1997 financial statements

were fairly presented.

Near the end of the meeting, one of the directors asked, almost as an aside,

how Sunbeam’s second quarter was progressing. Without answering the question,

Dunlap exploded into one of his trademark tirades. He berated the board members

for their skepticism and threatened to quit unless they gave him their

unconditional support. Afraid of losing their superstar CEO, the directors did

what they could to placate Dunlap and adjourned the meeting.

Early the next morning, Sunbeam’s general counsel David Fannin called

one of the board members and revealed what Dunlap had withheld the previous

afternoon. Sunbeam was facing a $100 million revenue shortfall for the second

quarter and was in danger of violating important loan covenants. The directors

spent most of the next two days on the telephone with Sunbeam employees

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learning what they could about the company’s sad condition. By the end of the

week, Chainsaw had been axed.

Sunbeam’s Accounting

The answer to Jonathan Laing’s question in Barron’s was a resounding

“Yes.” Sunbeam had indeed used a variety of accounting tricks to inflate its 1997

revenues and profits. When Sunbeam eventually revised its financial statements, it

restated 1997 net income to $38.3 million from the $109.4 million originally

reported.

Al Dunlap’s first official act as CEO of Sunbeam had been to hire Donald

Kersh as the company’s chief financial officer. Kersh possessed two

characteristics that made him invaluable to Dunlap. First, he was loyal. Kersh had

followed Dunlap to four companies since 1983. He was one of the few people on

earth who could stand working with Dunlap for more than a few months. Second,

he was a creative accountant. As each quarter ended, Dunlap instructed Kersh to

use the contents of his “ditty bag” to make sure Sunbeam met the analysts’

forecasts.6 Kersh, himself, joked of being Sunbeam’s “biggest profit center.”7

Kersh began filling his “ditty bag” during the fourth quarter of 1996 when

Sunbeam recorded $338 million of restructuring charges to cover the costs of

Dunlap’s reorganization plan. The SEC later determined that Sunbeam padded the

charges with at least $35 million of prematurely recognized expenses, excessive

writedowns, and improper reserves. Sunbeam expensed in 1996 more than $18

million of advertising, consulting, and product redesign costs that should have

been recognized during 1997. Kersh also wrote off $2.1 million of good inventory

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along with the obsolete and discontinued products. Sales of these items at normal

prices during 1997 artificially boosted Sunbeam’s profit margins. Finally, Kersh

set up a $12 million reserve for a lawsuit regarding a hazardous waste site.

Sunbeam recorded $9 million of income during the fourth quarter of 1997 after

settling the lawsuit for $3 million.

As early as the first quarter of 1997, Sunbeam began engaging in “channel

stuffing.” That is, the company offered customers discounts and other incentives

to place orders earlier than they would otherwise have done so. Sales soared

during early 1997, creating the impression of a quick turnaround. Yet Sunbeam’s

early “success” made it that much more difficult for the company to meet

subsequent sales targets. As 1997 progressed, Sunbeam had to offer increasingly

generous terms to get customers to place more orders.

Sunbeam soon began recording revenue for bill-and-hold transactions.

Sunbeam persuaded customers to place orders early for goods they would not

need until several months in the future. For example, Sunbeam reported revenue

in November 1997 for summer products such as barbecue grills and outdoor

furniture that customers would not need until the following spring. Sunbeam

continued to hold the goods so customers’ warehouses would not be burdened

with out-of-season merchandise. The customers often retained the right, through

explicit agreement or winks and nods, to cancel their orders prior to delivery. In

spite of these unusual terms, Sunbeam recognized revenue when the orders were

received.

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As the end of the year approached, Sunbeam resorted to even more

aggressive sales tactics. The company established a “distributor program” in

December that offered discounts, extended payment terms, and return rights to

customers willing to accept delivery before year-end. Sunbeam recorded $24.7

million of revenue during the fourth quarter for items customers had the right to

return in the future. In fact, significant amounts of the inventory “sold” during the

fourth quarter were returned to Sunbeam during 1998.

By the first quarter of 1998, it had become almost impossible for Sunbeam

to sell anything. Wal-Mart’s warehouses were loaded with a 20-week supply of

mixers and a 31-week supply of bread makers. K-Mart was holding more mixers,

bread makers, and rotisseries than it normally sold in an entire year. In one last

effort to meet its sales targets, Sunbeam changed its quarter-end from March 29 to

March 31. The Coleman acquisition was completed on March 30. The change in

reporting period allowed Sunbeam to record an additional $5 million in net sales

of Sunbeam products and almost $15 million of net sales from Coleman, a

suspiciously high amount for the last two days of a quarter.

Sunbeam’s Auditors

Phillip E. Harlow was the engagement partner in charge of Sunbeam’s

audits from 1994 through 1998. In May 2001, the SEC filed a civil injunction

alleging that Harlow’s unqualified audit opinions on Sunbeam’s 1996 and 1997

financial statements were false and misleading.8 Contrary to the audit reports

signed by Harlow, Sunbeam’s financial statements were not fairly stated and

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Arthur Andersen’s audits had not been performed in accordance with professional

auditing standards.

The SEC accused Harlow of failing to exercise appropriate skepticism

while conducting Sunbeam’s audits. Specifically, the SEC staff criticized Harlow

for not challenging Sunbeam’s $12 million environmental litigation reserve

during the fourth quarter of 1996. Harlow did not independently verify the

amount, but relied almost exclusively on Sunbeam’s general counsel’s opinion

that the reserve was appropriate. Harlow also failed to critically examine the

purpose of Sunbeam’s 1997 bill-and-hold transactions. An impartial observer

would have concluded that the deals were driven by Sunbeam’s desire to meet

analysts’ quarterly sales and earnings forecasts rather than by any legitimate

business purpose.

Even more damning, the SEC found evidence that Harlow had knowingly

permitted Sunbeam to misreport several transactions. The auditors had correctly

identified $18 million of costs that should not have been included among

Sunbeam’s December 1996 restructuring charges. Harlow proposed several

journal entries to bring Sunbeam’s books into compliance with GAAP. When

Dunlap and Kersh refused to record the adjustments, Harlow went ahead and

issued a clean audit opinion on the 1996 statements after concluding that the $18

million of uncorrected errors were immaterial in relation to Sunbeam’s overall

financial condition.

Harlow discovered, but permitted, more accounting shenanigans in 1997.

In probably the most bizarre transaction Sunbeam attempted, Kersh recorded $11

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million of revenue and $8 million of profit on the “sale” of spare parts to the

contractor Sunbeam used to handle its warranty claims. Except the contractor

never actually agreed to purchase the parts and certainly not for $11 million. The

contractor had merely signed an “agreement to agree” to buy the parts at a price to

be determined. When Harlow concluded that no gain should be reported on this

apparently sham transaction, Kersh reduced the profit by $3 million. Rather than

insisting that the entire transaction be erased from Sunbeam’s books, Harlow

concluded that the remaining profit was immaterial and allowed it to remain.

Harlow also proposed, but ultimately passed, a $2.9 million entry to correct

overvalued Mexican inventory and $563,000 of other miscellaneous adjustments.

Approximately 16 percent of Sunbeam’s reported 1997 income came from items

Harlow had proposed as adjustments in 1996 or 1997, but Sunbeam had not

corrected.

Harlow and his firm paid dearly for allowing Sunbeam to have its way

with its accounting. Arthur Andersen paid $110 million to settle a lawsuit filed by

Sunbeam’s investors. Harlow was suspended from appearing or practicing before

the SEC as an accountant.

Burnt Toast

Throughout the SEC’s investigation of Sunbeam and the company’s

restatement of its 1996, 1997 and 1998 earnings, Dunlap insisted that he was not

responsible for the company’s accounting problems. Dunlap defended the

propriety of the bill-and-hold transactions, claiming they were done to smooth out

sales of seasonal products. According to Dunlap, “There was a clear transfer of

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title, risk of loss, etc., to the customer, the inventory was properly segregated, and

all revenue recognition criteria under GAAP were met.”9 As to the other

accounting issues, Dunlap said he relied on advice from his accounting staff, the

three outside directors on his audit committee, and Arthur Andersen. Dunlap

denies ever directing his employees to do anything improper.

While no Sunbeam employees have publicly accused Dunlap of ordering

or even approving improper accounting, several have described a hostile work

environment in which employees were under intense pressure to “make the

numbers.”10 Quarterly sales and earnings goals were nonnegotiable. Failure was

not tolerated. Sunbeam’s director of international sales recalled a meeting at

which top executives were given earnings targets and told, “Your life depends on

hitting that number!”11

Employee stock options created another powerful incentive for Sunbeam’s

aggressive accounting. Dunlap’s crew of roving turnaround specialists had little

affection for Sunbeam. They had even less fondness for Dunlap due to his abusive

personality and habit of humiliating employees. Sunbeam’s top managers worked

at the company and tolerated Dunlap’s abuse only because they thought they

could make a lot of money quickly. All the senior managers knew that if Sunbeam

failed to meet the analysts’ forecasts, their work and suffering would be for

naught.

The SEC charged Dunlap, Kersh, and four other Sunbeam executives with

conspiring to fraudulently misrepresent the company’s operations.12 No criminal

charges were filed, however, and Dunlap and Kersh were permitted to settle the

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civil charges without admitting or denying guilt. Each was permanently barred

from serving as an officer or director of a public company. Dunlap paid a

$500,000 fine while Kersh paid $200,000. Dunlap’s only real punishment, other

than the damage to his reputation, came through private litigation. He paid $15

million in January 2002 to settle a class-action suit filed by Sunbeam

shareholders.

Sources

Brannigan, Martha. “Sunbeam Slashes Its 1997 Earnings in Restatement.” Wall

Street Journal, October 21, 1998.

Byrne, John. Chainsaw. New York: HarperCollins Publishers, 1999.

Canedy, Dana. “Three Acquisitions by Sunbeam in Separate Deals.” New York

Times, March 3, 1998.

Dunlap, Albert, with Bob Andelman. Mean Business: How I Save Bad

Companies and Make Good Companies Great. New York: Random

House, 1996.

Greene, Kelly. “Dunlap Agrees to Settle Suit Over Sunbeam.” Wall Street

Journal, January 15, 2002.

Laing, Jonathan. “Dangerous Games: Did ‘Chainsaw Al’ Dunlap Manufacture

Sunbeam’s Earnings Last Year?” Barron’s, June 8, 1998.

Lavelle, Louis. “Boy Next Door to ‘Rambo in Pinstripes.’” Sunday Record,

November 10, 1996.

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Martinez, Amy. “Auditors Settle Sunbeam Suit; Investors to Get $110 Million.”

Palm Beach Post, May 2, 2001.

Norris, Floyd. “They Noticed the Fraud but Figured It Was Not Important.” New

York Times, May 18, 2001, C1.

Securities and Exchange Commission. Accounting and Auditing Enforcement

Release No. 1393, In the Matter of Sunbeam Corporation. May 15, 2001.

Securities and Exchange Commission. Accounting and Auditing Enforcement

Release No. 1395, SEC v. Albert J. Dunlap et al., May 15, 2001.

Securities and Exchange Commission. Accounting and Auditing Enforcement

Release No. 1706, In the Matter of Phillip E. Harlow, CPA. January 27,

2003.

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1 Al Dunlap with Bob Andelman, Mean Business: How I Save Bad Companies and Make Good

Companies Great (New York: Random House, 1996), 21.

2 Ibid.

3 Ibid., xii.

4 John Byrne, Chainsaw (New York: HarperCollins Publishers, 1999), 180.

5 Jonathan Laing, “Dangerous Games: Did ‘Chainsaw Al’ Dunlap Manufacture Sunbeam’s Earnings

Last Year?” Barron’s, June 8, 1998.

6 A “ditty bag” is a pouch used by military personnel to carry small personal items such as sewing

implements and grooming items.

7 Byrne, Chainsaw, 167.

8 Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 1395,

SEC v. Albert J. Dunlap et al., May 15, 2001.

9 Byrne, Chainsaw, 361.

10 Ibid., 153.

11 Ibid., 157.

12 SEC, AAER No. 1395, SEC v. Albert J. Dunlap et al.